Originally created 05/31/97

First quarter growth too fast to last

WASHINGTON (AP) - Economic growth skyrocketed during the first three months of the year at the most rapid rate in a decade. But it was too fast to last and analysts already see abundant signs the economy is coming back to earth.

The gross domestic product - the total of all goods and services produced in the United States - expanded at a 5.8 percent seasonally adjusted annual rate in the first quarter, even higher than an earlier estimate of 5.6 percent, the Commerce Department said Friday.

"The good news just won't quit," Vice President Al Gore declared in the White House press room, citing previous reports showing low unemployment, high consumer confidence and growing incomes.

"These facts and figures tell a story of an historic success in turning around the American economy and moving it in the right direction," he said.

This year's first quarter marked the fastest growth since the fourth quarter of 1987. But, as with most good things, it must come to an end, economists said.

Continued growth at such a sizzling speed would quickly use up the economy's scant excess capacity, sending both inflation and interest rates climbing.

"I don't think anyone would argue the economy could continue to expand at that pace for very long without generating inflationary pressures," said economist Mark Zandi of Regional Financial Associates in West Chester, Pa.

Already for April, the government has said retail sales and factory production fell. And in a separate report Friday, the Commerce Department said sales of new single-family homes fell 7.7 percent in April to a seasonally adjusted annual rate of 772,000. That marked the sharpest decline in six months and was down from an 11-year high of 836,000 in March.

Even the phenomenally strong GDP report offered a sign of the moderation to come. Much of the upward revision in GDP growth came because businesses built their inventories at a faster rate than first calculated. That, along with an improvement in export growth, more than made up for downward revision in consumer spending.

Without the inventory accumulation, the economy would have grown at a 3.8 percent rate in the first quarter - a less stratospheric though still robust pace.

And because shelves and backlots are full, factory production probably will need to increase only modestly in the current quarter to meet demand.

"We could very well see inventories being a drag on economic growth. Factories have been humming, producing a lot of goods, while retail sales seem to be softening," said economist Sung Won Sohn of Norwest Corp. in Minneapolis.

Analysts look for growth to slow to about a 2 percent pace in the current quarter. They're divided over the economy's course after that, with some seeing the modest pace continuing into next year and others predicting a rebound that will require the Federal Reserve to raise interest rates again to prevent inflation from accelerating.

Monetary policy-makers raised short-term rates by a quarter percentage point in March but at a meeting last week passed up the chance for another increase.

Friday's GDP report provided the first look at the quarter's after-tax corporate profits. They rose at a seasonally adjusted annual rate of 4.5 percent, the largest gain in a year.

"While that is not enough to justify all the rise in the stock market during the first quarter, it at least provides a rationale for the market's exuberance," said economist Mark Vitner of First Union Mortgage Corp. in Charlotte, N.C.

However, a warning of disappointing earnings from the computer giant Intel jarred the stock market Friday. The Dow Jones average of 30 industrial stocks slid 88 points but recovered and closed at 7,331.04, down just 0.86 points.

The bond market was pleased by the signs of a coming slowdown. The yield on the 30-year Treasury bond fell to 6.91 percent, down from 6.97 percent Thursday.


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